South Carolina Tax Attorney

I am frequently asked if you have a “small” business in your home do you have to pay taxes on what you earn.  Of course, you have to pay taxes on your net gain.  So that leads to the next question.  What type of expenses can I write off in my business.  The IRS regulates what expenses can be deducted from your business income to determine what the net profit is for a business.  For a legitimate business you can deduct “ordinary and necessary expenses for conducting a trade or business.

For this post and probably a short series posts we are going to discuss what sets a legitimate business apart from a hobby.

There are several factors that are used by the IRS to determine what is a “business” and what is a “hobby.”  The difference could mean whether you can deduct expenses on your tax return and for some people that may be a substantial amount of money you will owe Uncle Sam at the end of the year. These factors (listed below) are not all-inclusive and they are all weighed in the decision, stated another way - one factor does not determine the classification as hobby or business.

1. Does the time and effort put into the activity indicate an intention to make a profit?
2. Do you depend on the income from the activity?
3. If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
4. Have you changed your methods to improve profitability?
5. Do you have the knowledge needed to carry on the activity as a successful business?
6. Have you made a profit in similar activities in the past?
7. Does the activity make a profit in some years?
8. Do you expect to make a profit in the future from the appreciation of assets used in the activity?

With few exceptions, an activity is presumed a business if it has made a profit in at least three of the last five years.  Follow along with me through this series to determine if that little “business” you have going on in your garage is truly a business or more of a hobby.